Obama goes back to Bush playbook and declares war on “price gouging” oil companies

"I’m concerned about higher gasoline prices. The government has the responsibility to make sure that we watch very carefully and investigate possible price-gouging, and we will do just that." — George W. Bush, 4/17/2006

Congress is vowing to take actions that it believes will reverse runaway crude and gasoline prices. Oil rose above $136 a barrel on Monday – more than double what it cost a year ago – and gas hovered around $4.07 a gallon.” – CNN, 6/24/2008

"We are going to make sure that nobody is taking advantage of American consumers for their own short-term gain." – Barack Obama, 4/20/2011

gasprices21Whenever the price of gas spikes the call goes out from Washington to investigate price gouging. Unfortunately, this leads to one of the great intellectual challenges of capitalism: Defining price gouging. Problem is no one can separate “taking advantage of consumers for short-term gain” from what is usually called profit taking.

To quote Collateral Damage Sr.: "In a society that has a free market fetish, if not a religion, what is price gouging? Is nine percent profit gouging the price? Or 15 or 50 percent? At what price point does profit change into gouged profit?"

Well, here are a few samples from people who have tried to split that particular hair.

First, former Rep. Bart Stupak, (D-Mich), from 2006:

When we were doing the Energy Policy Act last fall, in the town of Midland, right by my district there, gas went up 90 cents in one day. Now, is that not gouging?

If you take a look at it, from September 2004 until September 2005, refineries have increased their prices 255 percent. Isn’t that gouging?

I mean, I think we all know what gouging is. What we need is a federal standard so we can hold the oil companies’ feet to the fire and make sure we know what factor goes into every gallon of gasoline, so at least the American public will have some transparency and get a fair shake on what goes into a price of a gallon of gasoline.”

Next up:

New York State law prohibits price gouging during a state of emergency. The law specifically provides that, in order to prevent any party from taking unfair advantage of consumers during an abnormal disruption of the market, the charging of "unconscionably excessive" prices is prohibited.”

I like that one the best because it is by the former Attorney General/Governor of New York, Eliot Spitzer. Did he wonder about price gouging as he paid all those ladies of negotiable morality?

And finally this one from the very accurately named blog, Neutral Source:

There is no objective definition. Economists–who specialize in price theory and the behavior of markets and can study these things ad nauseum–have no definition for it, either. In fact, economists have avoided the term as if it were a social disease. A review of all the microeconomics textbooks on Neutral Source’s bookshelf reveals that none have as much as an index entry.”

Price gouging, like porn, is in the eye of the beholder. One thing everyone agrees on about it is that it is always committed by someone else.

For businesses price gouging is "when my competitor gets away with charging more than I thought to charge."

For the general public, price gouging is when a company that I don’t work for or have investments in is charging me too much. Profits are when my company is making enough money to not lay me off.

Actually addressing this problem would involve fundamental changes in our system that are much needed but which no one is willing to actually contemplate. Instead we will get more of this Kabuki Theater. The next act will come when the oil companies declare their quarterly earnings. This will be followed by bi-partisan denunciation of  their “excessive profits” and a number of bills will be proposed which will go nowhere.  Then the oil companies will attempt some sort of PR move to show that they are really nice guys and that will be that.

 

Chrysler gambling with sales incentive that helps pay for gas

Not sure if this is brilliant or depressing. Or both.

Chrysler announced Monday an offer that caps the price of gasoline at $2.99 a gallon for three years for people who buy or lease new vehicles from Wednesday through June 2. The offer is based on 12,000 miles of driving per year at the vehicle’s rated fuel economy. Customers will get a card for buying gas that is linked to their own charge account, Chrysler said. The customer will be billed $2.99 a gallon, and Chrysler will pay the rest.

I’m sure the honchos in Auburn Hills did their math on this (and when was the last time a US car company didn’t correctly anticipate fuel costs?) but to me it looks like this could get pretty expensive.

The story goes on to point out that at the current $3.61 a gallon average gas price, someone who buys a new PT Cruiser (est. 21 MPG) would only cost the company $1075 per car. That seems a bit much but not ridiculous for a car with an MSRP of $15,285.

However let us take the radical notion that gas prices have not yet peaked. If the price of gas hits $5 a gallon (and I wish that were unthinkable) the total cost to the company hits $3300*. Even if the price “only” hits $4.50 per, the company is on the hook for $2580 per car. Suddenly that PT Cruiser is costing Chrysler a lot.

All of this, btw, assumes something we all know to be false: That there is a relationship between the advertised MPG and what you actually get. If the car actually gets 18 MPG then Chrysler has to pick up the actual difference. At today’s prices that means a mere $150 increase over three years. However at $4.50 it’s about $500 more — which means Chrysler is in essence selling the PT Cruiser for about $12K. For the consumer it’s a great anti-inflation move, for the shareholders though? Well, for gas company share holders it’s great.

The other thing that will contribute to Chrysler’s costs is the fact that consumers will probably buy more expensive grades of gas. Why not always get super premium if it only costs me $2.99?

Here is my own personal indicator of the impact of the price of gas: I am now driving at or below the speed limit. This news so shocked Mrs. CollateralDamage that she briefly put down the latest guide to Disney.

*(In case you’re wondering here’s the formula I used 12000[miles] / 21 [MPG] = total gallons consumed [which I’ll call G]. G * price = total cost / (G * price – 2.99) = annual cost to Chrysler * 3 = total cost to Chrysler. Given my legendary inability to do anything beyond basic math I put this out there so that someone can and will correct me.)

Congress accuses oil companies of being successful

With motorists paying a national average of $3.29 a gallon at the pump and global oil prices remaining above $100 a barrel, the oil executives were hard pressed by lawmakers to defend their profits.

Hurrah! Washington has heard the call to battle and is taking up arms to protect us all from price gouging.

“Anyone who is trying to take advantage of this situation while American families are forced into making tough choices over whether to fill up their cars or severely cut back their budgets should be investigated and prosecuted,” House Speaker Dennis Hastert, (R-Ill), and Senate Majority Leader Bill Frist, (R-Tenn), wrote in a letter to President Bush.

Oh wait, I wrote that two years ago, during the last offensive in the War On Price Gouging. To update the story all you have to do is insert the names Nancy Pelosi and Harry Reid in the above. (My favorite quote in today’s stories on the topic: “House Republican leader John Boehner mocked the hearing as a ‘politically motivated, made for TV’ event.”  Yep, it’s good when it’s us but ‘bad when it’s them.)

The only real difference in this year’s version of the hearings is that the oil companies are now being asked to defend the $18 billion in tax breaks they receive.  To which one nonplussed CEO responded, “Dude, you’re the ones that gave them to us.”

The House of Rep has passed a bill that would “phase out” these tax breaks over 10 years. Why it takes a decade to get your face out of the public trough, I have no idea. Not that it matters. The bill has about a good of chance of becoming law as the Cubs do in having a successful centennial season.

While I am all in favor of ending this sort of corporate welfare, Congress’ recurring interest in the profits of oil companies is a pointless PR exercise. It is just like their sudden fascination with baseball and steroids. Instead of accusing these execs of the sin of making “too much” money, maybe we could get them jobs at some of our larger financial institutions.

Excessive profits! Price gouging! Isn’t that another name for capitalism?

Just as no one can define terror, no one has any idea what price gouging is either. This fact is made plain in the GOP-sponsored House bill, which leaves it to the Federal Trade Commission “to develop a definition of price gouging.” You have to love a law that is so specific about the penalty and so vague about the crime.

Italy unleashes PR stunt to stop inflation

Shades of Jerry Ford and Whip Inflation Now

WINItaly’s government has decided to appoint a special commissioner to try to curb price rises after inflation hit a three-and-a-half year peak in November … The ombudsman, dubbed “Mr Prices” by Italian media, will inform the industry minister of any “anomalous” or unjustified price increases and can also make proposals for legislation.

What exactly is an “unjustified” price increase? Isn’t that basically at the heart of the theory of capitalism? I set a price and either the market meets it or it doesn’t. If I can sell bananas at $500 each then shouldn’t I? I’m not saying this is a good thing but it is how we’ve designed the system.

This brings us back to the debate over “price gouging” by oil companies last year.

Just as no one can define terror, no one has any idea what price gouging is either. This fact is made plain in the GOP-sponsored House bill, which leaves it to the Federal Trade Commission “to develop a definition of price gouging.” You have to love a law that is so specific about the penalty and so vague about the crime. (and if I do say so myself the rest of that rant is pretty good … I suggest reading the whole darn thing.)

I expect Signor Prices will, in some form, be coming to the US soon.

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I now understand BP’s claim to be a green oil company

Quoth the Wall Street Journal:

Public, Political Pressure May Rise
As Inquiry Looks Into Possibility
Of Manipulation in Gas, Oil Prices

Federal investigators are examining whether BP manipulated crude-oil and unleaded-gasoline markets, signaling a rise in regulatory scrutiny of the British energy giant, said lawyers and traders close to the case.

See here we all thought that by green they meant concern for the environment. That claim was so ludicrous (see Alaskan oil fields) but now it makes sense: Green = $. And it’s refreshingly honest, too.
If these allegations are true it proves that BP has problems on more than just a moral level. How dumb does a gas/oil company have to be to bother with manipulating markets in THIS economy? Mr. Gild, meet Mr. Lilly. Even by my lax standards this falls under “excessive profit taking.”

Big Oil’s latest staggeringly dumb PR move

Top executives at oil giant Shell have begun a 50-city tour across the United States this summer in hopes of persuading angry consumers that Big Oil is not ripping them off.

John Hofmeister, president of Shell Oil Co., and other company execs “plan to meet with everyone from average Americans struggling to pay rising prices at the pump to city officials and governors on their tour.” What exactly to call this tour … Gasapalooza? Monsters of Capitalism? Nasty As They Wanna Be? And who’s the opening act? Maybe the CEO of Merk trying to persuade angry consumers that Big Pharma is not ripping them off?

How rampant is the insecurity over there at Shell HQ? I don’t see any other possible explanation as to why these guys feel it so important to be liked? This is like a crack dealer wanting hugs from his customers.

Speaking as a consumer of oil-products, I find this whole idea more than a little insulting. We’re not stupid, Mr. Hofmeister. There’s no part of the phrase “record profits” that we don’t understand. We all know where those profits are coming from because we all fill up our cars. We all remember when the idea of $3 a gallon gas was impossible to imagine. Not to long ago, gas at that price was supposed to be one of the signs of economic apocalypse.

Hofmeister explained the trip by saying: “These are unprecedented times that require unprecedented responses.” Yes, how about some nice unprecedented silence? Remember your PR strategy: Speak very softly and carry a big profit margin.

My sympathies to whomever is stuck doing Shell’s PR work … I do not think they are responsible for this. Ideas this bad have to come straight from the CEO because otherwise it would have never got off the whiteboard.

There is always a well-known solution to every human problem–neat, plausible, and wrong. — Mencken

Dear Big Oil: It’s time to declare victory and shut up…

"If we didn't have this level of profitability, I don't think we could get the supplies to where they need to get to."

John Hofmeister, president of Shell Oil Co.

The oil industry should just give a gag order to itself. Yes, they are making a helluva a lot of money — the biggest challenge they face is choosing between "obscene" and "pornographic" when describing their profits. They feel compelled to defend their earnings because … well, I don't know why. Because some PR person said they have to? The only explanation that anyone would believe — "Because we can" — is apparently not in the approved soundbite check list. 

Oil companies should consider it, though. Not onlu would it have the novelty of being the truth, but it is also far better than what they actually are saying. In addition to the quote above, other excuses include the famous "in Europe gasoline prices are more like $5 per gallon to $7 per gallon." (Ummm, isn't most of that because of taxes? What does that have to do with profits? Maybe the oil companies are saying that if their profits were really big they would be pay for for national healthcare and college tuitions?) Another loser: saying oil is inexpensive because look how much it would cost to fill it up with … (not making this up) … coffee. Fortunately for the oil co. exec who said this did it on NPR so the interviewer neither laughed in his face nor asked a follow up question.

Word to the wise: It's never too late to shut up.

Perhaps the oddest comment on the topic of oil from the Sunday yak fests:

"This is a global business, and it's not only that we need to add to supply, but we need to reduce demand. In the United States alone, we have about 2 percent of world oil reserves, 5 percent of the population and yet we use about 25 percent of the world's consumption of oil."

This from wild-eyed radical conservationist James J. Mulva (who is not only the chairman of ConocoPhillips Co. but the only oil company CEO to have played a key role in a Seinfeld episode). Are consumers so gullible as to believe the oil-company-as-environmentalist PR position? Probably, and if they don't it won't be because BP didn't try hard enough.

They report, you decide

FTC Finds Gas Price Gouging After Katrina

WASHINGTON (AP) – The Federal Trade Commission on Monday said it found 15 examples of gasoline price gouging after Hurricane Katrina, though the agency said it has not identified any widespread effort by the oil industry to illegally manipulate the marketplace.The agency sought to downplay the instances of price gouging by seven refiners, two wholesalers and six retailers, chalking up their soaring prices in September 2005 to "regional or local market trends."

For the purpose of the report, and as mandated by Congress, the FTC defined price gouging as "any finding" that the average price of gasoline in designated disaster areas in September 2005 was higher than in August 2005.

FTC sees no illegal gas price manipulation

WASHINGTON (Reuters) – An investigation by U.S. antitrust authorities found no evidence that oil companies illegally manipulated gasoline prices or constrained oil refining operations, the Federal Trade Commission said on Monday.

However, the agency said it had found 15 examples that fit lawmakers' definition of price-gouging at the "refining, wholesale, or retail level." It said factors like regional and local market trends appeared to explain the pricing in nearly all the cases.

Where were you during the war on price gouging?

Hurrah! Washington has heard the call to battle and is taking up arms to protect us all from price gouging.

“Anyone who is trying to take advantage of this situation while American families are forced into making tough choices over whether to fill up their cars or severely cut back their budgets should be investigated and prosecuted,” House Speaker Dennis Hastert, (R-Ill), and Senate Majority Leader Bill Frist, (R-Tenn), wrote in a letter to President Bush. Of course they only mean taking advantage monetarily, not politically.

What better way to protect us than with a mountain of useless paper? This explains why many, many different bills are winding their way through Congress to deal with this threat. The one just approved by the House would impose criminal penalties and fines of up to $150 million for energy companies unable to distinguish the difference between making money and making too much money.

This offensive against excessive profit continues the trend of declaring war on chimerical concepts that began with our efforts to curb “terror.” Don’t you miss the good old days when we only attacked nouns? The wars against cancer and poverty weren‘t any more successful than the current bunch but at least you knew what the hell we were trying to eradicate.

Just as no one can define terror, no one has any idea what price gouging is either. This fact is made plain in the GOP-sponsored House bill, which leaves it to the Federal Trade Commission “to develop a definition of price gouging.” You have to love a law that is so specific about the penalty and so vague about the crime.

It is imprecise because it has to be. Otherwise it would be totally laughable. Witness the efforts of Sen. Maria Cantwell (D-Wash.) who has proposed a bill that would levy fines of up to $3 million on oil companies, refiners, distributors, or retailers found to be “taking unfair advantage of the circumstances to increase prices unreasonably” or imposing “excessively unconscionable price increases.” This suggests that oil companies and their ilk would have a legal defense as long as they could prove a price increase was either excessive or unconscionable but not both.

The Cantwell bill does offer some guidance on the issue, saying that gouging depends on whether the price charged amounts to “a gross disparity” from the usual price of oil and gasoline. However, it does not give any specific dollar or percentage increase to define what “a gross disparity” would be. Once again the dirty work is left to someone else, in this case that would be the judiciary. (I found out about Sen. Cantwell’s bill while reading a story on MSNBC with the misleading headline: What is price ‘gouging,’ and can it be stopped? It was misleading in that it answered neither question.)

Price gouging, on capitol hill at least, is not unlike the old definition of obscenity – I know it when I see it. Consider this quote by Rep. Bart Stupak (D-Mich):

When we were doing the Energy Policy Act last fall, in the town of Midland, right by my district there, gas went up 90 cents in one day. Now, is that not gouging?

If you take a look at it, from September 2004 until September 2005, refineries have increased their prices 255 percent. Isn’t that gouging?

I mean, I think we all know what gouging is. What we need is a federal standard so we can hold the oil companies’ feet to the fire and make sure we know what factor goes into every gallon of gasoline, so at least the American public will have some transparency and get a fair shake on what goes into a price of a gallon of gasoline.

Well, that certainly clears things up. So if the folks in DC don’t know what price gouging is, does anyone else?

New York Attorney General Eliot Spitzer writes (in a column which makes repeated references to 9/11 – surprise, surprise) that

“New York State law prohibits price gouging during a state of emergency. The law specifically provides that, in order to prevent any party from taking unfair advantage of consumers during an abnormal disruption of the market, the charging of “unconscionably excessive” prices is prohibited.

New York’s law, like that of most other states, says that price gouging can only occur during a time designated as an emergency by the government. So it IS price gouging if a hurricane hits my state and you jack up the price of duct tape by 1000%, but it is not price gouging if you charge me $2 to conduct an electronic bank transaction that costs you $.002 as a part of normal business. Apparently no one has yet thought to make highway robbery illegal.

That is not just my opinion either. This is from Arizona Attorney General Terry Goddard’s testimony to the Senate:

Traditional price gouging laws are not in effect during periods of “business as usual”. Rather, they only go into effect when the normal competitive checks and balances of the free market are disrupted by a disaster or other emergency. When a population is trapped and desperate for essential supplies, like food, water, shelter and gasoline, victims do not have the opportunity to shop around or wait to purchase essential products until the prices go down. Demand is steady regardless of the price, so unscrupulous businesses can and sometimes do take advantage of consumers.

Need a rule of thumb? Then just remember unscrupulous business practices during an emergency = BAD. But unscrupulous business practices under other circumstances = Good.

(Special note should be made of Louisiana’s price gouging statute:

During a declared state of emergency, a merchant is prohibited from selling goods or services at values which exceed the prices normally charged for comparable goods and services in the same market area at or immediately before the time of the state of the emergency. Businesses may raise prices on items for which they incur additional costs, however, these price increases should not be excessive. Price gouging is a misdemeanor and can result in a $500 fine or six months in jail.

Well, if the threat of a $500 fine doesn’t keep Exxon in line what will?)

There are other definitions as well:

The sages at Princeton say it is “pricing above the market when no alternative retailer is available.” Which could be read to mean that any time you have a monopoly, you are a price gouger. So much for an Ivy League education.

My favorite definition is from a site called Neutral Source:

There is no objective definition. Economists–who specialize in price theory and the behavior of markets and can study these things ad nauseum–have no definition for it, either. In fact, economists have avoided the term as if it were a social disease. A review of all the microeconomics textbooks on Neutral Source’s bookshelf reveals that none have as much as an index entry.

…Price gouging is defined by a buyer, generally after the fact, who is deeply unhappy that the price he willingly paid was much higher than the price he would have preferred to have paid. As the gap between actual and preferred prices rises, the buyer’s sense of unfairness and anger towards the seller intensifies.

Equally good is one from a website called Truck and Barter, (which has the wonderful tag line “Where Sympathy and Hedonism Collide”):

Price gouging is the raising of prices 1) far above one’s costs and far above competitors prices, 2) far above what many people think is just, 3) during a human crisis. I disagree with those that state that PG is a non-concept. It is an intentionally vague and deceptive, morally abstruse, and economically harmful concept, but for those very reasons, it must be taken seriously.

Or you could go with the words of some lunatic named Neil Boortz: “What is price gouging anyway? Just a buzzword used by the anti-capitalist, government-educated among us.”

Yep, Bill Frist, George Bush and Denny Hastert – anti-capitalists. I’ll have some of what Mr. Boortz is drinking please.

Anti-capitalists Hastert and Frist have asked fellow Commie President Bush “to direct the Justice Department and Federal Trade Commission to investigate the rising oil prices.” Across the aisle, the Dems are also using the FTC as a whipping boy.

Quoth Rep. Stupak again: “See, when the president calls for an investigation by the FTC into the price of oil to see if there’s gouging going on, it doesn’t do us any good, because the FTC, the Federal Trade Commission, has never brought a case for price gouging on petroleum products ever.”

One slight problem: One FTC official, though, told CNN that the trade commission can only look into anti-competitive practices and has no legal authority to investigate price gouging.

The GOP has also floated the idea of hitting the energy companies with a windfall profits tax which has got to be the funniest thing I’ve ever seen. Aren’t windfall profits the Republican’s raison d’etre? Next thing you know George Bush will be calling for abetter mileage on cars. Oh, wait …

One of these “price gouging” bills will inevitably pass through Congress’ digestive tract and get placed in a steaming pile on the president’s desk where it will promptly get signed. Why not? Our elected officials will be able to say they have done something without actually running the risk of doing anything. This law will never be enforced. If someone tries to it will be laughed out of court.

To really address this issue would require a long and critical look at how we choose to define capitalism or what the late Mr. Galbraith called the “free markets where nothing is free.” But that hasn’t happened since 1931.

There is one simple solution to the problem, but no one in this hemisphere has tried it. It’s called a Bolivian. But remember, simple does not mean good.

Tuesday’s Quote of the Day

"I'm concerned about higher gasoline prices. The government has the responsibility to make sure that we watch very carefully and investigate possible price-gouging, and we will do just that." — George W. Bush

George strikes his head against one of the great intellectual challenges of capitalism: Defining price gouging. Traditionally, prige gouging has been defined as "when my competitor gets aways with charging more than I thought to charge." In this case it might be defined as ridiculously high prices charged when I have gotten out of the business. Enlightened self-interest, indeed.

Allow me to quote myself from November 3rd of last year:

There is a problem that every company and industry would like to have: Record profits and ever-increasing demand for your product. So why is it that oil companies announcing third-quarter profits are squirming like Kathy Lee Gifford touring a sweat shop? Three reasons. One, they sell a product whose price fluctuations are posted on practically every street corner. Two, the US public’s knee-jerk reaction is to suspect the oil companies of ripping them off at the pump no matter what. Third, well, these profits all came in the wake of hurricane season when gas prices were at an all-time high. In other words – it sure looks like they were making money on tragedy.

gasprices How much money have they made? During the third quarter of this year Exxon Mobil had $10 BILLION in profits. Collateral Damage Sr. did the math on this: The company has been making exactly $74,879.23 every minute.

How bad is this for the oil cos? If you’re an investor, not bad at all. However, in the public marketplace it is a disaster. Things have gotten so bad that an increasing number of those socialists in the GOP want the industry to kick in 10 percent of their profits to pay for winter heating bills. Iowa Sen. Charles Grassley, who chairs the Senate Finance Committee, said he sent a letter to oil companies to "embarrass" them into contributing to the Low Income Home Energy Assistance Program. The wind seems to be blowing extra cold out in the prairie states these days as Nebraska Rep. Lee Terry, a Republican who sits on the House Energy and Commerce Committee, is also calling for Big Oil to pony up.

How do you address this from a marketing perspective? Have your lobbying group claim that A) you really haven’t made that much money and B) it’s really everyone else’s responsibility.

According to a nice article over at AdAge, American Petroleum Institute prez Red Cavaney says "A number of people in Congress are railing against the industry’s windfall profits, but we made only 7.5 cents on a dollar of sales." Cavaney says that on a per-dollar basis, several companies – including Citigroup, Microsoft and Coca-Cola – all made more money last quarter. (And that’s leaving out the undoubtedly equally ridiculous per-dollar profits of Google.) Big Oil also thinks that, really, consumers ought to be more conservation minded. Drive less. Car pool. That sort of thing. Not sure how that will help this winter, though. Can we all share the same domiciles to pool our heating?

Mr. Cavaney is in one of those impossible positions periodically foisted on industry leaders by capitalism. Clearly he had to say something. Just as clearly his industry is being pilloried for being successful. What do you say? While his response of "No, we aren’t" was never going to fly, is there anything that would have? Quoth AdAge: "A majority of Americans, 87%, said oil companies are gouging them on gasoline prices, according to a survey in mid-September by Opinion Research Corp. for the non-profit Civil Society Institute."

But that begs the question – again quothing CD Sr. – "In a society that has a free market fetish, if not a religion, what is price gouging? Is nine percent profit gouging the price? Or 15 or 50 percent? At what price point does profit change into gouged profit?"

In the public eye, price gouging is when you are charging me too much and profits are when I am making a decent amount. I am sure it is just coincidental that gas prices are falling faster than FEMA’s approval ratings in the wake of all this political hullabaloo. Yep. Just a coincidence.